Get Ready for Shift in Fed Policy

Tue, Oct 28, 2014 - 10:28am

A slew of largely positive earnings reports and Fed anticipation provide the backdrop for today’s market action. Stocks are holding steady on a positive note despite the Durable Goods report that came in weaker than expected.

We won’t get the post-meeting FOMC statement until Wednesday afternoon (we wouldn’t have the presser this time), but there is little doubt about a couple of things:

The QE program is coming to an end, notwithstanding hopes of a minority of folks that global growth worries would prompt the Fed to delay the exit. Recent comments by a notable Fed official gave rise to those hopes, but the odds of it happening appear very low. The Fed genuinely wants to get out of the QE business and start the monetary policy ‘normalization’ process.

As part of that process, the market’s focus will be on the ‘extended period’ guidance in the post-meeting statement that the Fed has been repeating for a long time to indicate a timeline for when they will start raising rates following the QE conclusion. They didn’t change the language the last time around. But with QE coming to an end now, they have no option to come up with something new.

Beyond the Fed, Tuesday's Durable Goods report came in on the weak side, though it may be hard to read too much into that report given its historical volatility. Unlike the Durable Goods report, however, the overall tone of Tuesday's earnings reports is reassuring and positive.

[Hear: Bert Dohmen: Central Banks Can Keep the Game Going a Lot Longer]

We have a few disappointing results, but numbers from Pfizer (PFE), Cummins (CMI), Aetna (AET) and others are broadly positive. In total, we have more than 200 companies reporting results, including 48 S&P 500 members, about half of which reported on Tuesday and the rest after the close.

Including most of Tuesday's reports on the books, we now have Q3 results from 242 S&P 500 members that combined account for 59.5% of the index’s total market capitalization. Total earnings for these 242 companies are up +4% from the same period last year, with 70.7% of the companies beating earnings estimates. Total revenues are up a much stronger +4.6%, with 53.3% beating top-line estimates.

It’s a mixed picture when the results thus far are compared to what we have been seeing from the same group of companies in recent quarters. Earnings growth is weak relative to other recent quarters, but revenue growth is tracking better. Earnings beat ratios are about in-line with recent history, though revenue surprises are a bit on the weak side, and we are not seeing any improvement on the guidance front, either.

Guidance has been weak for more than two years now, and we are seeing that trend continue into this earnings season as well. What this means is that the persistent negative revisions trend that we have been seeing for a while will remain in place for the current and coming quarters. The current +4.7% earnings growth expected in Q4 has come down from +5.1% on Friday and close to +9% just a few weeks back. With the reporting cycle peaking this week, we will likely see the revisions trend further accelerate in the coming days.

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